(The following statement was released by the rating agency)
NEW YORK, April 01 (Fitch) Fitch Ratings assigns a 'BBB-' rating
to Seminole
Tribe of Florida's (STOF) proposed $750 million term loan. Fitch
also affirms
STOF's Issuer Default Rating (IDR) at 'BB+', the gaming
enterprise revenue
bonds at 'BBB-' and special obligation bonds at 'BB+'. Fitch
revises the Rating
Outlook to Positive from Stable. See the full list of rating
actions at the end
of this release.
The proposed term loan will be pari passu with STOF's existing
term loan and
gaming enterprise revenue bonds and will be secured by a revenue
pledge of
STOF's gaming operations, which include six major casinos in the
state of
Florida with nearly 13,000 slot machines and approximately 340
table games.
The proposed term loan will amortize at a rate of 7% per year
with a balloon
payment in 2020. Proceeds along with cash on hand will be used
to repay $794
million outstanding on the existing term loan due to mature in
2014. Preliminary
financial maintenance covenants include a maximum net leverage
test of 2.5x and
minimum interest coverage of 3.0x. The term loan will come with
an accordion
option permitting STOF to borrow up to 2x leverage or $500
million, whichever is
greater.
KEY RATING DRIVERS
The Rating Outlook revision to Positive on STOF's IDR is
supported by Fitch's
increased comfort with the tribe's governance and fiscal
management since Fitch
downgraded STOF out of investment grade in 2010 following a
Notice of Violation
(NOV) from National Indian Gaming Commission (NIGC). Since the
NOV the tribe
took measures to correct the violations related to the NOV.
In the May 2011 tribal council elections, three of the five
incumbents were not
reelected, with a fourth incumbent resigning prior to the
elections. Two of the
prior council members were involved in actions that led to the
NOV.
The newly elected council pledged to increase tribal reserve
levels to equal two
months of governmental expenditures (or about three times
historical levels).
Reserves reached target level in 2012 and are budgeted to grow
by additional 30%
by fiscal year-end 2013 (ends September 30). In January 2013,
STOF's council
passed a resolution eliminating per capita payments to minors
born after the
resolution effective date, which is pending an approval from the
Bureau of
Indian Affairs. Nearly 60% of the governmental budget goes to
pay per capita
payments to tribal members and nearly 50% of the tribe's
population is under 18.
As a result of the measure, STOF estimates that aggregate per
capita payments
will be reduced by approximately 15% and 30% in years five and
10 of the
implementation, respectively, compared to per capita payments at
such time if
the resolution was not passed. Relative to present per capita
spending levels
the estimated reduction is 3% after five years and 7% after 10.
The full
realized savings resulting from the resolution will materialize
after 18 years
following the implementation.
Also reflected in the Outlook revision is the extension of the
gaming division
management's employment contracts (CFO through 2015 and CEO
through 2018) and
the improved maturity profile with the refinancing of the term
loan that was due
to mature in 2014.
RATING SENSITIVITIES
Fitch believes that STOF's operating profile and credit metrics
are consistent
with 'BBB-' IDR, and a further track record of fiscal prudence
by the tribe may
result in an upgrade of the IDR to 'BBB-' within the next 12-24
months.
Specifically, an investment grade IDR can be supported by
STOF's:
--SOLID COMPETITIVE POSITION: In the state of Florida with a
monopoly in Tampa
(nearly half of EBITDA) and strong position relative to the
pari-mutuels in
southeast Florida, where STOF's three casinos benefit from a
lower tax structure
as well as ability to offer tables games and allow smoking.
STOF's smaller
casinos in Immokalee and Brighton (together accounting for 7% of
EBITDA), as in
in Tampa, have no competition.
--STRONG CREDIT METRICS: Relative to industry peers (commercial
and tribal),
STOF's leverage through the gaming debt is 1.4x, and it is 1.9x
if the special
obligation bonds on the tribal side are included. Leverage
metrics should
improve in the near term as much of the debt in STOF's capital
structure
amortizes rapidly. STOF may look to borrow to fund expansion
capex in the medium
term as Fitch believes some of its properties are capacity
constrained; however,
leverage on the gaming side should remain at or below 2x. Fitch
calculates total
debt service coverage by EBITDA at 4.2x and STOF's covenant
coverage, which is
based on maximum annual debt service (MADS) and spreads the term
loan balloon
payment over six years, is 3.3x for period ending Dec. 31, 2012.
--SIGNIFICANT OFFSETS TO REGULATORY RISK: Since STOF's gaming
compact allows
STOF to suspend compact revenue share payments, partially or
completely, in the
event the state legislature authorizes additional commercial
gaming in the state
or allows STOF's table games authorization to expire in 2015.
Authorization of
new facilities in Broward and/or Miami-Dade Counties or
expiration of STOF's
ability to offer table games would permit STOF to stop paying
compact fees based
on revenues generated at its Broward County facilities (about
50% of revenues).
Expansion of gaming outside the two counties mentioned above
would allow STOF to
suspend compact revenue share payments completely.
The next event Fitch will be monitoring closely is the May 2013
tribal council
election, in which three of the five council seats will be up
for re-election. A
re-election of the current council members, or Fitch gaining
comfort that the
newly elected members similarly espouse fiscal prudence, would
be a positive
consideration for an upgrade.
Continued buildup of reserves at the tribal level and/or at the
gaming level
would also be viewed positively. However, an upgrade would not
be precluded if
reserves are maintained at existing levels should STOF spend
incremental
accumulated surpluses on growth capex on the gaming side or more
critical
projects on the tribal side.
On the operating side, build-out of slot operations at Dania Jai
Alai (Dania)
could pressure STOF's slot revenues at Seminole Hollywood
Classic and to a
lesser extent at Hard Rock Hollywood. Dania is being sold by
Boyd Gaming to a
private investor group for $65.5 million. The potential for
additional
competitive pressure is manageable in context of the 'BB+' IDR
and can
potentially be accommodated within the context of 'BBB-'
depending on the
general operating environment and the scope of the project.
STOF's ability to operate table games expires in July 2015. A
failure to extend
table games past 2015 would be a negative as table games account
for 17% of the
gaming division's revenues and 14% of the EBITDA. As mentioned
above, expiration
of table games would be offset by reduced compact revenue share
payments (STOF's
revenue share percentage is effectively about 12%).
Over the next 12-24 months, worse than expected downturn in the
operating
environment and/or regulatory changes that would add significant
commercial
gaming capacity in the state of Florida may prevent or delay an
upgrade. There
is, however, cushion in the 'BB+' IDR to withstand these
potential pressures.
Regulatory Change Considerations
No major legislative action is anticipated in 2013, as the
Florida Legislature
set up a Senate gaming committee to conduct a comprehensive
study of gaming in
the state by the 2014 legislative session. The study will
consider the impacts
of potential gaming expansion. The committee did approve a ban
on Internet
cafes, which if passed in 2013 would be positive for STOF's
gaming operations.
Fitch believes there is a low likelihood that the integrated
resort legislation
passes in the near term, since it faces heavy opposition from
STOF, the
pari-mutuels, the Orlando theme-park companies and other
interest groups. If it
eventually passes, Fitch expects the impact on STOF's financial
profile will be
manageable. Per the compact agreement, STOF would be able to
stop making the
compact fee payments from its Broward County casinos (Hollywood
Hard Rock,
Seminole Hollywood Classic and Seminole Coconut Creek) which
account for about
half of the gaming division's revenues. Other facilities in
Immokalee, Tampa and
Brighton would not be directly impacted.
In 2011, bills were filed proposing three integrated casino
resorts in Broward
and Miami-Dade Counties. The minimum investment was set at $2
billion and the
tax rate was initially proposed at 10%. The bills were pulled in
the 2012
session due to lack of support. Fitch expects similar proposals
in the future,
since the initiative is heavily lobbied for by commercial
operators, especially
Genting Malaysia Berhad, which has purchased substantial prime
land in Miami for
a mixed-use development.
Operating Profile
The tribe operates six major casinos throughout the state of
Florida, including
two flagship Hard Rock branded properties in Tampa and
Hollywood. In 2012 STOF
completed major expansions at Hard Rock Tampa, Seminole Coconut
Creek and
Seminole Hollywood Classic. Per the 2010 compact with the state,
the tribe has
exclusivity to Class III slots outside of Miami-Dade and Broward
Counties
through 2030. Table game exclusivity applies to the entire state
but the tribe's
authorization and exclusivity to operate table games expires in
2015 unless
renewed.
STOF's gaming division operating performance was resilient
through the 2008-2009
recession and the period of heavy expansion of slot machines at
the pari-mutuel
facilities in Miami-Dade and Broward Counties. The resiliency
can be largely
attributed to STOF's strong market position and the conversion
to Class III
slots and addition of table games starting 2008.
Revenues and EBITDA were up 4% and 2%, respectively, in fiscal
2012 while
revenue and EBITDA in the quarter ending Dec. 31, 2012 were each
up 5% and 3%.
Management mentioned that January in 2013 was strong while
February was softer.
The stated reasons for the softness are common amongst regional
gaming operators
and include higher gas prices and increased payroll tax.
Fitch expects revenue to be up slightly in 2013 as further
ramp-up of expansion
projects completed in 2012 offsets Fitch's lackluster outlook
for the regional
economy. Reported EBITDA will increase in line with revenues but
operating cash
flow will be pressured by an increase in compact payments that
went into effect
July 2012 (from $150 million to the higher of $233 million or
12% of gaming
revenues). STOF uses the straight line accounting method to
expense the $1
billion it guaranteed the state in compact revenue share
payments over the first
five years of the agreement ($200 million per year) so there
will be little to
no impact on the reported EBITDA.
Cash flow available for tribal distributions should remain
relatively constant
as gaming division annual debt service may decline by nearly $60
million by
October 2013. This includes reduced amortization on the new term
loans, maturity
of series 2005A notes and potential refinancing of the 2010
notes.
STOF's gaming division added to an already strong management
team in 2012 with
the hire of Larry Mullin as COO. Mullin's previous position was
as a CEO of Echo
Entertainment, a major casino operator in Australia, and prior
to that Mullin
managed Borgata in Atlantic City. The hiring of Mullin should
bolster STOF
gaming division's marketing efforts and his employment contract
runs through
2016. The gaming division made other high-profile hires recently
including SVP
of IT, SVP of HR and SVP of Slot Operations.
Liquidity
As part of the term loan refinancing STOF gaming division plans
to move $97
million of restricted cash now in a debt service fund to the
division's
unrestricted cash. Another $61 million of restricted cash will
be used to repay
a portion of the 2007 term loan and to cover transactions costs
associated with
the refinancing. STOF does not maintain a revolver and
historically maintained
limited cash at the enterprise level in excess of what is
required for
day-to-day operations. Therefore, Fitch views the added
liquidity positively as
it cushions the tribe against the increased compact revenue
share payments while
debt service reduction discussed above materializes over the
next six months and
expansion projects completed in 2012 continue to ramp up.
The tribe now has sufficient reserves to operate for two months
without
receiving any revenues including distributions from the gaming
enterprises and
expects to grow the reserve further. Besides its gaming
division, the tribe also
owns Hard Rock International, which paid dividends to the tribe
over the past
three years.
Pro forma for the term loan issuance, the maturity profile is
favorable. The
next bullet maturity will be in 2017, when $367 million revenue
notes series
2010 come due. These notes trade at a significant premium and
could be called in
October 2013, when they become callable.
Transaction Specific Ratings
The one notch differential on the gaming division debt (includes
the bonds and
the term loan) relative to the IDR and the investment grade
rating reflects:
--The additional debt incurrence test in the 2005 indenture of
3.5x leverage for
the senior lien gaming division debt (4.5x for total gaming
division debt) and
gaming division MADS coverage by EBITDA test of 3.0x. The new
term loan is
expected to be more stringent with a 2.5x maximum net leverage
maintenance test;
--The gaming division seniority in the casino revenue trustee
guided waterfall
relative to the special obligations bonds;
--The gaming division debt holders' ability to shut off the flow
of funds at the
gaming division level before distributions into the Governmental
Distribution
Fund are made if MADS coverage by EBITDA goes below 2x. Money
retained in the
waterfall would go towards redeeming the gaming revenue debt
with some carveouts
for payments to the tribe to maintain critical governmental
operations.
The special obligation bonds only have recourse to the funds
available in the
Governmental Distribution Fund so there is risk that the debt
service on these
bonds will not get paid if MADS coverage goes below 2x on the
gaming side. The
special obligation bondholders do not have recourse to the tribe
outside of the
cash in the Governmental Distribution Fund, which receives the
flow of funds
monies through a trustee after the gaming division debt is paid.
Money is
released to the tribe from the Governmental Distribution Fund
once the debt
service on the special obligation bonds is paid.
The special obligation bonds' indenture has an additional debt
incurrence
covenant stipulating that pari passu debt cannot exceed 15% of
Available
Revenues.
Fitch affirms the following ratings:
Seminole Tribe of Florida
--IDR at 'BB+'; Outlook to Positive from Stable);
--$367 million gaming division bonds, series 2010A&B at 'BBB-';
--$412 million gaming division bonds, series 2005A&B at 'BBB-';
--$889 million term loan at 'BBB-';
--$435 million special obligation bonds, series at 'BB+';
--$94 million special obligation bonds, series 2008A at 'BB+'.
Contact:
Primary Analyst
Alex Bumazhny, CFA
Associate Director
+1-212-908-9179
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Secondary Analyst
Adam Dolkart
Associate Director
+1- 1 312-368-2095
Committee Chairperson
Michael Paladino, CFA
Senior Director
+1-212-908-9113
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Email:
brian.bertsch@fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
The ratings above
were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial
Corporate Issuers'
(Nov. 13, 2012);
--'Fitch Upgrades Seminole's Gaming Bonds to 'BBB-'; Special
Obligation Bonds to
'BB+'; Outlook Stable' (June 25, 2012);
--'2013 Outlook: U.S. Gaming' (Dec. 17, 2012).
The ratings above were solicited by, or on behalf of, the
issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research
Corporate Rating Methodology
here
Recovery Ratings and Notching Criteria for Non-Financial
Corporate Issuers
here
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
here
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